Global and regional accounting professional organization dynamics
The International Federation of Accountants urges all parties to work together to achieve high-quality audits
The International Federation of Accountants (IFAC) published a viewpoint article entitled "Achieving High-Quality Auditing", calling on all stakeholders in the audit and assurance ecosystem to take action to optimize the audit process, Improve auditing standards, improve the skills and thinking mode of auditors, strengthen the governance of enterprises and accounting firms to achieve high-quality audits.
IFAC stated that achieving high-quality audits requires the establishment of a well-functioning system based on ethics and independence. This involves many factors, including appropriate personnel, appropriate governance, and appropriate supervision, conducting the correct audit that meets the expectations of stakeholders, and evaluating it through appropriate standards. The main contents are as follows:
The first is to implement appropriate audit procedures. The purpose of the audit is to provide reasonable assurance as to whether the financial report is prepared on the basis of the applicable financial report preparation and whether there is any material misstatement. Stakeholders, especially the corporate board of directors, governance and management, should regard auditing as a value-added process, rather than a compliance process that only issues audit opinions on financial reports. Audit procedures and results should increase public confidence in risk assessment, accounting valuation and assessment, internal control, data collection, and the responsibilities of management.
The second is to allocate appropriate auditors. Auditors are an important factor in achieving high-quality audits. They should safeguard public interests. They must be experienced, honest, independent, and possess corresponding professional judgment and professional skills. Therefore, on the basis of strict compliance with professional ethics, the environment for conducting audit business must be able to attract, develop and retain the best talents.
The third is to formulate appropriate governance measures. High-quality auditing relies on a well-functioning ecosystem with the participation of accounting professional organizations, corporate boards of directors, governance, and management. A good corporate culture and governance structure are essential to achieving high-quality audits. And auditors, no matter how comprehensive their skills or resources are, it is impossible to face all the major flaws in the ecosystem alone.
The fourth is to implement appropriate supervision. Supervision plays an important role in improving audit quality and ensuring that audits meet reasonable expectations. At the same time, because supervision may lead to low-value response behaviors or unintended consequences, the cost of supervision may also be greater than the benefits of supervision. Therefore, appropriate supervision must be implemented, including appropriate regulatory frameworks, auditing standards, accounting firm business models, and Auditor's responsibility treatment method.
The fifth is to adopt appropriate evaluation standards. Audit quality includes a number of quantifiable and non-quantifiable key elements, which ensure the continuous high-quality audit activities to the greatest extent. The global accounting industry conducts thousands of audit projects every year in accordance with the International Auditing Standards and the Code of Professional Ethics. Major audit failures are rare. Existing data also show that audit quality is generally positive. The accounting industry and regulators are committed to improving the quality of audits, but they cannot monitor factors that they cannot assess. IFAC calls on accounting firms, accounting professional organizations and regulators to improve audit quality assessment and reporting standards.
(Original link: https://www.ifac.org/what-we-do/speak-out-global-voice/points-view/achieving-high-quality-audits)
Relevant accounting professional organizations focus on fraud and going concern matters in financial report auditing
The International Auditing and Assurance Standards Board (IAASB) issued a discussion paper entitled "Considerations of Fraud and Going Concern in Financial Reporting Audits",
In order to prompt stakeholders to discuss the auditor's responsibilities regarding fraud and going concern matters in the financial report audit, and to discuss whether the audit standards related to fraud and going concern matters are applicable to the current environment.
Since then, IAASB has held several virtual round tables to discuss the following:
The first is the impact of technological progress on fraudulent behavior and the discovery of such behavior;
The second is the public's perception of fraud and going concern matters, and the gap between it and the expectations of auditors' responsibilities;
The third is fraud and going concern matters in the audit of less complicated entities.
The International Federation of Accountants (IFAC) has responded to the above documents, supporting IAASB to focus on fraud and going concern matters in financial report audits, and agrees that all stakeholders in the financial reporting chain should work together to issue high-quality audit reports.
IFAC believes that IAASB should focus on the following areas:
The first is to guide the public to regard auditing as a value-added service and eliminate the expectation gap;
The second is to improve the International Auditing Standards through evidence-based methods, while maintaining the principle-oriented and risk-oriented methods of the standards, and urging the standards to continue to coordinate with the requirements of the applicable financial report preparation basis;
The third is to explore the needs and possibilities of formulating relevant standards in addition to auditing services for other assurance services that focus on the discovery of fraud and continuing operations.
In addition, the Institute of Chartered Accountants in England and Wales (ICAEW) also gave feedback on the above-mentioned documents. The main contents include:
The first is that fraud needs to be resolved by companies, investors, auditors, regulatory agencies, and standard setting agencies;
Second, it is necessary to consider the difficulty and time lag of obtaining information related to high-quality corporate fraud cases, encourage IAASB to cooperate with auditing and capital market regulatory agencies, disclose the source of fraud case studies, and explain corporate fraud in detail;
Third, the IAASB needs to further clarify the difference between fraud, accounting errors, and non-compliance with laws and regulations;
Fourth, changes in accounting policies will not directly constitute accounting errors or fraud, but may become fraud over time. The IAASB should clarify these subtle differences to emphasize the role of professional judgment.
Accounting career trends in relevant countries and regions
Association of Chartered Certified Accountants: Auditing is the key to maintaining confidence and trust in the capital market
The Department of Business, Energy and Industrial Strategy of the United Kingdom recently released an audit white paper to solicit opinions on how to restore public confidence in audit and corporate governance in the post-Brexit era.
The Association of Chartered Certified Accountants (ACCA) commented on this, stating that auditing is the key to maintaining confidence and trust in the capital market, and that corporate directors, audit committees and regulatory agencies play an important role together.
ACCA mainly makes recommendations from the following four aspects:
One is to support the opening of the audit market to change the dominant position of the "Big Four". The primary goal of audit market reform is to support high-quality audits.
The second is to welcome the new industry regulatory agency, the Audit, Reporting and Governance Agency (ARGA), and believe that ARGA will help strengthen the supervision of the accounting industry and boost the market and the public’s confidence in accounting information and the accounting industry.
The third is to support corporate directors and the board of directors in principle to take on more responsibilities in detecting and preventing fraud, but it is recommended to carefully consider the degree of matching between the directors and the responsibilities, and fully consider any potential negative effects.
The fourth is to clarify the "new audit industry" plan, and suggest that the government, ARGA, accounting professional organizations and accounting firms work together to consolidate the attractiveness of the accounting industry and ensure that the professional skills of the accounting industry are still valued by the business community.
The U.S. Public Company Accounting Oversight Board releases statistics and analysis data on punishment cases from 2018 to 2020
The American Public Company Accounting Oversight Board (PCAOB) summarized and analyzed the penalties that have been closed in the past three years and the penalties imposed on accounting firms and auditors. The details are as follows:
1. Overall situation
From 2018 to 2020, there were 67 penalized cases. Among them, the number of penalized cases for Chinese accounting firms and auditors was 0, 3, and 4, respectively, showing an increasing trend. The accounting firms involved (including the directly penalized accounting firms and the accounting firms where the penalized auditors are located) vary in size, including the largest in the world including Deloitte, PricewaterhouseCoopers, Ernst & Young, KPMG, GT, and BDO Six accounting firms, including small and medium-sized accounting firms. From 2018 to 2020, the penalties imposed on small and medium-sized firms have shown an upward trend, with 12, 17 and 15 penalties respectively, accounting for 60%, 57% and 88% of the total number of penalties.
2. Penalties imposed on accounting firms
PCAOB imposes the following penalties on accounting firms:
The first is public condemnation. From 2018 to 2020, a total of 38 accounting firms were publicly condemned.
The second is administrative fines. From 2018 to 2020, a total of 39 accounting firms were fined ranging from US$10,000 to US$750,000.
The third is to temporarily or permanently cancel the registration qualifications. From 2018 to 2020, a total of 18 accounting firms have been disqualified from registration within 1-5 years, and they will apply again after the disciplinary period expires.
The fourth is to temporarily or permanently restrict part of the practice. From 2018 to 2020, an accounting firm was prohibited from issuing audit reports within 3 years.
The fifth is to take corrective measures. From 2018 to 2020, a total of 21 accounting firms were required to take corrective measures, including the establishment of a quality management system, so that the firm can reasonably ensure that the business team complies with applicable professional standards, regulatory requirements, and PCAOB audit standards related to financial internal control Issuer audit and review; formulate policies and procedures to enable the firm to reasonably ensure that its quality management policies and procedures are properly designed and are being effectively implemented; provide targeted training, etc.
The sixth is to appoint independent supervisors or consultants. From 2018 to 2020, an accounting firm was required to hire an independent consultant to review its policies, procedures, staffing and training independence and make recommendations.
3. Auditor's punishment situation
PCAOB imposes the following penalties on auditors:
The first is public condemnation. From 2018 to 2020, a total of 48 auditors were publicly condemned.
The second is administrative fines. From 2018 to 2020, a total of 35 auditors were fined ranging from US$5 thousand to US$50,000.
The third is a total ban on practicing temporarily or permanently. From 2018 to 2020, a total of 57 auditors were temporarily banned from practicing for 1-5 years. After the disciplinary period expires, they will apply for practicing qualification again. Among them, one auditor was permanently banned from practicing in 2019.
The fourth is a temporary or permanent partial ban on practicing. From 2018 to 2020, a total of 16 auditors were partially banned from practicing for 1-3 years.
The fifth is continuing education. From 2018 to 2020, a total of 25 auditors are required to receive 10-50 hours of continuing education, the content of which is directly related to the punishment.
Australian Securities Regulatory Commission issued audit inspection report
The Australian Securities Regulatory Commission (ASIC) released the latest audit and inspection report. Based on a risk-oriented approach, ASIC focused on 179 audit areas and reviewed 53 audit work papers.
ASIC found that in 27% of the auditing areas, auditors did not provide reasonable assurance for whether there are major misstatements in financial reports. Impairment and asset value, income and receivables, accounting valuations and assumptions are still the most concerned field of.
In order to urge accounting firms to improve audit quality, ASIC has adopted a number of regulatory measures.
The first is to take legal measures against auditors’ misconduct.
The second is to enhance the transparency of audit inspection results,
The third is to directly report the inspection results to the company’s board of directors or audit committee,
The fourth is to urge accounting firms to develop firm culture with audit quality as the core, allocate appropriate auditors for complex auditing business, and take actions to improve audit quality.
ASIC also recommends that accounting firms improve audit quality in many areas.
The first is to prevent conflicts of interest and maintain audit independence, such as rigorously assessing the threat of non-audit services provided to the audited entity to the principle of independence, and reviewing this assessment;
The second is to strengthen the governance structure of the accounting firm, such as arranging experienced external independent personnel for the governance layer, ensuring that partners and employees understand the protective measures formulated for reporting audit quality issues, and clarifying the responsibilities of the internal governance layer in the field of audit quality;
The third is to strengthen the accountability mechanism of accounting firms to urge partners to be responsible for audit quality, such as clarifying the partners’ practice goals and plans, taking corresponding punishments for partners, reviewers and related personnel who have problems with the audit business, and even deducting the audit partnership Salary, etc.;
The fourth is to conduct root cause analysis, so as to take actions to improve the audit quality when the audited entity's financial report content undergoes major changes.
The Institute of Chartered Accountants of Australia and New Zealand (CAANZ) welcomes the report and believes that “the audit inspection activities carried out by ASIC play an important role in the Australian economy, and auditors and stakeholders can learn about areas that need improvement and improvement.
Accounting firms in Australia and New Zealand will look for the root causes, explore the root causes of the problems found in the above inspections, and share them with the accounting industry."
The Hong Kong Finance and Remittance Bureau launched an investigation into the financial report of Guanhua International and related audit activities of Deloitte
On March 19, 2021, the Hong Kong Financial Reporting Council issued an announcement to investigate the annual financial report of Guanhua International as of March 31, 2020 and the interim financial report as of September 30, 2020, and to investigate Deloitte Investigate the audit activities of the above-mentioned financial reports. Prior to this, Deloitte Certified Public Accountants served as the auditor of Guanhua International and issued an unqualified audit report for it.
Guanhua International was in financial distress in 2020, unable to repay bank debts, and finally reorganized its debts. The company’s management issued an announcement in February 2021, stating that a loan document from the subsidiary was found during the debt restructuring, showing that the subsidiary signed a loan contract in December 2020, involving RMB 994 million.But the management did not know at the time. Deloitte Certified Public Accountants went to Jiangmen City, Guangdong Province to verify the loan situation and obtain a credit report in January 2021.
The credit report showed that the above-mentioned loan involved RMB 946 million, part of which was not included in the financial report, and a letter was sent to Guanhua International immediately to clarify the situation. The Guanhua International Audit Committee stated that it would try its best to obtain information from the auditor of the subsidiary for verification. Guanhua International shares have been suspended from trading on the morning of March 22.
International Accounting Company News
Ernst & Young calls for strengthening the responsibilities of auditors and regulators to prevent and detect fraud
Ernst & Young published a research report entitled "Prevention and Detection of Fraud: Strengthening the Responsibilities of Enterprises, Auditors and Regulators", discussing how to strengthen the role of auditing to better detect fraud.
The report cited the views of Sir Donald Brydon, former chairman of the London Stock Exchange Group, on audit quality and effectiveness, and pointed out that fraud is the most misunderstanding of the public's responsibility of auditors. Although auditors play an important role in the corporate governance and financial reporting chain, the auditors are mainly responsible for providing reasonable assurance to shareholders on whether there are major misstatements in financial reports, and how to prevent and detect corporate fraud is mainly governed by corporate management Responsible under layer supervision. However, the public hopes that auditors will play a far greater role than the duty of reasonable assurance in preventing major company failures caused by fraudulent behavior.
The report believes that as the external environment of enterprises continues to change, business models become more complex and fraudulent behaviors are more difficult to detect. It is indeed necessary to re-examine traditional audit procedures and models. The accounting industry has also improved auditing methods, such as the use of data analysis techniques, the development of e-correspondence procedures, the establishment of a fraud risk assessment framework, and the development of legal audits to improve the ability to prevent and detect fraud. To meet stakeholders' expectations of auditors regarding fraud. However, auditing is an important verification procedure, but not the only verification procedure. In view of the fact that the field of fraud is beyond the scope of auditors, corporate governance, auditors, and capital market regulators must work together to better prevent or detect fraud.
Firstly, companies should establish an internal control system for financial reporting that covers fraud risks, clarify the responsibilities of stakeholders such as the board of directors, management, audit committee, and internal audit, and explore how directors and management members can verify financial reports and their internal control procedures. At the same time, all stakeholders in the corporate governance chain including auditors should implement whistleblowing procedures to encourage and protect whistleblowers.
Secondly, we should study and improve auditing standards so that auditors can detect fraud under a stronger framework. The scope should cover materiality, professional suspicion, the use of legal experts to work, internal control, discussions with the audit committee, and public reports. In addition to preventing and detecting fraud, auditors also need to conduct assessments through relevant frameworks and report the company's internal control and risk management to the board of directors, regulatory agencies, and the public.
Thirdly, regulators should clarify the prerequisites for companies to go public-meeting minimum corporate governance and reporting standards. Even in some countries and regions, auditors are obliged to report to relevant agencies or decide whether to report any matter that violates laws and regulations and may affect financial reporting, and when the matter has not been resolved by management or governance, to the designated regulatory agency report. Regulators should have relevant responsibilities and resources to take action on such reported matters.
The report stated that to truly solve the problem of corporate fraud, the above-mentioned related parties-corporate governance, auditors, and capital market regulators must work together. Working together is the key step to better prevent and detect fraud and ultimately protect the victims.